Special Issues

Muckraking The Bailout: A Brief How-To

April 14, 2010, 12:00 am

By Corey Pein

This week's Indicators on the $1,052,157,000 in Thornburg Mortgage securities held by the Federal Reserve Bank of New York spun off of this April 1 story by Bloomberg News. The Fed acquired the Thornburg securities in 2008, during the first of the big bank bailouts. That was the Fed-managed sale of Bear Stearns, the investment bank where Garrett Thornburg got his start, and which he continued to do business with.

While Thornburg—one of Santa Fe's largest employers—didn't directly get a bailout, the US government still got stuck with its junk.

Nailing down the details of these transactions isn't simple; many of the deals leading up to and following the 2008 financial crisis were constructed as confusingly as possible, in part to deter scrutiny by outsiders. For a brief how-to in financial sleuthing, this post shows how to re-report the Indicators item on Thornburg and the Fed.

Following the Bloomberg story, SFR began by looking up the Fed's March 31 press release, which offers additional details on the assets it acquired during the Bear Stearns deal, using a government-controlled company called Maiden Lane.

The Fed release links to a PDF file labeled "Holdings of Maiden Lane LLC as of January 29, 2010." This is the document that shows the Fed's $1 billion in Thornburg Mortgage securities. This being a somewhat secretive deal, the accounting consists of gibberish:

It goes on like that, for 131 pages.

Fortunately, we know what we're looking for—the $1 billion Thornburg security mentioned in the Bloomberg story. So we can narrow things down quickly by searching the document for the letters "TM," which are common to Thornburg's sundry ticker symbols.

To nail it down, run a Google search on the CUSIP numbers in the far right column.Searching CUSIP and 885220KH5 returns a link to a Securities and Exchange Commission filing by a company called Thornburg Mortgage Securities Trust 2006-1. Bingo!

SEC filings are publicly accessible through a database called Edgar. Bookmark it; the database is full of info reported by thousands upon thousands of companies.

Searching Edgar for Thornburg Mortgage Securities Trust get us closer to the target:

Clicking through to the TMST 2006-1 security leads us to a list of all its filings. Let's look at the initial prospectus, filed Jan. 20, 2006, which explains just what was for sale—and what the Fed now owns:

This shows that half of the mortgages in this Thornburg security were given to borrowers who provided less than complete documentation of their income and assets, suggesting they perhaps shouldn't have qualified for a loan in the first place, and may be at risk of default. Thornburg Mortgage executives bragged that they offered loans to only the most creditworthy customers; such standards evidently didn't apply to the securities Thornburg sold to investors.

Certainly, other companies were even less scrupulous. Bloomberg reports that 94 percent of the mortgages in another Fed-held security had “limited documentation." Nearly 10 percent of the homes in that security have entered foreclosure. Foreclosure rates in the Thornburg security are not that high—but, as the prospectus shows, interest rates on most of its mortgages aren't set to increase for several more years.